Holidays Act overhaul: The changes employers need to know about

The legislation has led to eye-watering underpayments

Holidays Act overhaul: The changes employers need to know about

The Holidays Act was brought into force in 2003 and since then, successive governments have promised to reform it. In recent years, a number of significant employers have needed to pay their staff for errors in holiday pay assessment.

In 2016 the police paid over $33 million to staff. In 2019 district health boards revealed they owed $550-650 million due to mistakes made in leave and shift allowances paid under the Holidays Act. While the complexity of the Holidays Act has contributed in no small part to these eye watering errors, it’s also been one of the reasons it’s taken so long for reform to happen.

The Government has finally accepted the Holidays Act Taskforce’s recommendations to try to make the Holidays Act clearer and provide more certainty for employers and employees. The task force made 22 recommendations which were jointly agreed to by union and business representatives.

The Ministry of Business, Innovation and Employment has always encouraged employers and employees to try to resolve different Holidays Act interpretations in good faith. The changes will require employers to keep more comprehensive leave records showing how leave entitlements are calculated, paid and held. Payslips will be required for each pay period, detailing used and remaining leave entitlements. These changes are intended to benefit both employers and employees in terms of greater transparency.

The Government has also outlined increases to some leave entitlements. Employees will become immediately entitled to bereavement leave and family violence leave. Sick leave will immediately accrue from the employee’s first day of work. Bereavement leave will be expanded. Employees returning from parental leave will be paid at their full rate for their annual holidays. Previously, employees on parental leave continued to accrue annual leave but at a limited dollar value.

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The Government expects to have introduced legislation by early 2022. Businesses and employers will be given plenty of time and guidance to prepare for the changes. As with everything, the devil will be in the detail.

One area that has caused problems is intermittent or irregular work. A clearer definition of what intermittent or irregular means has been signalled. Employers will no longer be able to pay as you go for employees on fixed-term contracts of less than 12 months and will be required to review pay as you go for employees every 13 weeks. Employees will still not become eligible for annual leave until after 12 months continuous employment, but they will be able to take leave in advance, on a pro rata basis.

Employees currently have a minimum entitlement to four weeks’ annual holidays per year. However, problems have been caused by a lack of detail about how to determine what a week is. This is not obvious where employees work variable hours or receive variable pay.

The Government has signalled that the focus will be on hours defined in an employment agreement or roster. If no hours are set out in the employment agreement or roster then employers will use average hours worked over a corresponding day or a previous 13-week period. It is, perhaps, unfortunate that calculation of holidays is still referenced to weeks or portions of weeks rather than time units. Historically, the measurement of holidays in terms of weeks has contributed to errors.

Perhaps the most consistent cause of problems has been how holiday and leave payments are calculated. The Government is introducing a new concept of ‘‘ordinary leave pay’’. Ordinary leave pay is what the employee would have earned if they had been at work on the days in question.

There has also historically been a lack of clarity around what payments are included in ‘‘gross earnings’’. The Government intends to clarify that gross earnings means all cash payments received except direct reimbursements for costs incurred. This also amounts to an expansion of gross earnings by including discretionary payments.

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There is a fear that rather than simplify leave calculations, the introduction of ordinary leave pay in fact adds complexity. While employers and employees wait for the new legislation to be introduced, the employer’s obligation to remediate remains. The labour inspectorate continues to support employers to remediate employees for historical underpayments. The inspectorate will also continue its programmes of audits and investigations.

Other changes have been signalled by the task force proposals, but the current information on these is limited. For example, the current Act is silent on how availability provisions interact with leave.

The task force proposes clarification on how availability provisions and leave interact. The task force also proposes that provisions are amended to reduce the chance of employees being disadvantaged by transferring a public holiday to another day.

Closedown provisions will be amended to provide greater transparency and certainty and reduce negative outcomes for employees. The ability to pay out annual leave accruals at the beginning of a closedown at 8% will be removed, as will the reset of anniversary dates after a close down period.

When a business is sold or transferred under the current Act, employees must have all of their leave entitlements paid out and reset. Many employers are confused by these provisions. The task force has recommended that employees have a choice about whether to transfer all of their leave entitlements or have them paid out.

Almost two decades since its enactment, the Holidays Act is finally going to get that long overdue reform. However, whether the new legislation achieves its intended purpose to provide transparency and clarity remains to be seen. More information is available at the Ministry of Business, Innovation and Employment’s website.

By John Farrow, partner, Anderson Lloyd

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